The present invention relates to a process for monetizing an aspect of the real estate sale transaction and a method of speculating on real estate values. Particularly, the invention relates to a method of securitizing the brokerage fees typically collected upon the sale of commercial and residential real estate, and trading these brokerage fees by creating a futures and options market based on the value of these brokerage fees.
Millions of new and existing homes are sold each year in the United States. The residential mortgage market in itself is a trillion dollar industry. However, one of the largest obstacles to purchasing a home is amassing the relatively large amount of cash needed for up-front closing costs. Large downpayments and closing costs prevent many potential homeowners from being able to buy a home, even at attractive mortgage rates. Therefore, the need exists to develop a financial vehicle and method of selling real estate that can alleviate some of the burden faced by potential home purchasers.
The most common and critical function which facilitates the sale of real estate so that, for example, home buyers can purchase homes and home sellers can, in turn, also buy homes, is the brokerage function. The brokerage function is the process whereby real estate agents represent and assist buyers and sellers of real estate in their searches and transactions associated with finding a suitable property and effecting a transfer of ownership. While property prices, characteristics, and other functions can vary widely from one real estate transaction to another, the brokerage function and the commission earned by the broker for that service (typically 6% of the sale price in the United States) remain constant. However, despite its importance and constancy, the brokerage function remains one of the least efficient, underutilized, and improperly valued aspects of the real estate market. Therefore, a need exists for a method of using the real estate brokerage function and, more specifically, broker commissions as a tracker of real estate values, an investment opportunity, a method of easing the closing cost burden on purchasers, and for various other purposes.
During the 1970s, Wall Street developed and popularized new techniques for financing home purchases by providing capital to fund the purchase of residential mortgages. Banks and Savings and Loans were no longer required to fund and hold the hundreds of billions of dollars of mortgages being originated each year. Instead, the securities industry perfected techniques to pool millions of mortgages and sell them in pools to financial investors. Liquidity was injected into the mortgage system, economies of scale were achieved, rates to borrowers decreased as pools spread out risk and made capital more readily available, and a trillion dollar industry emerged. The securities industry acted as the conduit for buying, pooling, and re-selling mortgages.
The benefits of financing mortgages through the pooling of originated loans and selling them in tranches (prioritized, individually priced, and credit-rated segments) to sophisticated investors are now well proven. The real estate market has seen hundreds of billions of dollars in capital become available through securitizing mortgages. The real estate market has been infused with new capital and increased liquidity. As a result, more Americans have been enabled to buy real estate at better interest rates.
In the past 30 years, securitizationxe2x80x94the technique of financing cash flows generated from individual or pooled assets such as residential mortgagesxe2x80x94has also been used to finance numerous other statistically-predictable cash flows. Examples of such statistically-predictable cash flows include commercial real estate mortgages; oil, power, and telecommunications accounts receivables; cross-border earning remittances; credit card payments; and retail accounts receivables. Securitization enables investors to invest in securities with a calculated risk/reward profile commensurate with their goals and objectives. Rating agencies assess the relative risk profile of each transaction and rate the different tranches of securities, providing various levels of returns for investors. Securitization, as a financing and investor vehicle, has become a trillion dollar business in this country and is gaining popularity overseas. It is the perfect investment tool when historical information is available. Statistical analysis can be used to gauge risk and return, and large volumes of securities can be amassed to achieve economies of scale and lower costs while increasing returns.
Pools of future cash flows can be securitized so long as the cash flows have been engineered to conform to pre-established standards, and investors can statistically determine the payment characteristics of the cash flows so that the various tranches can be sold at rates commensurate with the investment""s risk. The aggregation of large pools of cash flows enables statistical analysis by rating agencies and sophisticated investors leading to standardized ratings and buying levels. Commercial properties are also financed using this technique. Even construction and interim loans can be financed using securitization. In today""s economy, securitization can be used to finance any cash flow that can be statistically measured by investors who will be able to assign a risk level to the timing and probability of receiving such cash flow.
Since the brokerage function is a necessity in most real estate transactions, and since the associated brokerage commissions are predictable, they lend themselves perfectly to the securitization process. Information on factors such as average time to sell a property, time on the market, median and average property prices, and commissions earned are all readily available and can be used by rating agencies, investment bankers, and investors to structure such transactions. As such, the timing of the sales commission, the amount of the commission, the value of the income stream, and the likelihood of income realization can all be statistically projected using the plethora of historical information available from government institutions and other recognized sources. As a result, a new process may be developed to serve real estate buyers and sellers whereby the right to future real estate brokerage commissions (hereinafter referred to as the xe2x80x9cReal Estate Brokerage Optionxe2x80x9d or xe2x80x9cREBOxe2x80x9d) can be purchased, assigned, sold, and traded.
The REBO would be purchased from the natural holder of that right, namely the existing property owner. Moreover, that right can be purchased in exchange for compensation at the time when the owner needs it most, namely when he or she is purchasing the property or soon thereafter (although the right may be purchased at any time during the owner""s ownership of the property). Moreover, the compensation may take any of a wide variety of forms acceptable to the owner.
Given the predictability of the future value of brokerage commissions and their utility as a valid real-time measure of property value, the process of securitization can be used to xe2x80x9cmonetizexe2x80x9d the value of future brokerage fees in the present. In other words, brokerage commissions to be earned in the future can be converted to securities with a present-day cash value. The amount of the actual compensation necessary to acquire a particular REBO will vary depending upon factors such as the value of the property at the time the REBO is purchased, the statistically predictable time to resale, and the statistically predictable future value of the acquired REBO, among others; but is ultimately a future cash flow that can be estimated within an acceptable degree of statistical certainty. As such, the REBO lends itself well to the asset-backed securitization process and provides a financial vehicle capable of many benefits including assisting real estate property buyers in funding their new purchases and providing new investment opportunities for investors to diversify their portfolios.
The present invention relates to a process involving the buying and selling of real estate. Particularly, the invention relates to both a method of securitizing the real estate brokerage commissions typically collected upon the sale of real property, and a method for trading securities derived from these commissions through the creation of a related futures and options market.
In one aspect of the present invention, an investor purchases from a real estate property owner, for a fixed sum, the assignable right to be the owner""s sales broker when the owner decides to sell the property. The compensation paid may be in the form of cash or an equivalent non-cash incentive. The amount of the option premium paid to the owner will vary depending upon a number of factors including, but not limited to, the value of the property and the predicted amount of brokerage commission to be earned upon resale of the property. To ensure that the owner fulfills his obligation to pay the eventual brokerage fee to the REBO owner in the event the property owner sells the property, a notarized document may be signed and recorded in public records (e.g., by attachment to the deed of the property) so that no sale of the property could be consummated without the REBO owner being notified and compensated as required by the agreement.
Of course, the property owner has the right to decide whether he will sell the property and when he will do so. There need not be an obligation on the property owner to sell the property. However, once the property owner decides to sell the property, the REBO owner will be informed, for example, by the property seller or by the new mortgage lender that the property has been sold and that the parties wish to satisfy their obligation to the REBO owner to remove the encumbrance on the property. The owner of the REBO ultimately receives the brokerage commission once the contracted-for brokerage services have been supplied, either by the REBO owner or by a third party on behalf of the REBO owner.
In another aspect of the invention, the REBO may be assembled into a pool with other REBOs for purposes of risk allocation and investment diversification. A pool of REBOs may contain REBOs from a specific area such as a particular city, county, state, or region; or the pool may contain REBOs diversified by geographic location, estimated selling price, estimated date of sale, or other factors alone or in combination. Then, pursuant to the principles of securitization as detailed above, pools of REBOs may be assessed, valued, and sold in tranches to various investors. The tranches will each have to be valued and rated before being issued. Accordingly, the process and advantages of securitization can be applied to the brokerage commission function to provide property purchasers with money today for a service to be rendered in the future. Consequently, property purchasers are served by having some of their burdensome transaction costs defrayed, while the pooling of REBOs along with well-known securitization techniques allows investors to diversify by investing in a new type of security with a predictable risk/reward calculation.
Yet another aspect of the invention involves the creation of a real estate futures and options market. Derivative instruments are created whose value preferably approximates the real estate values underlying the REBOs. The values of these instruments will rise and fall with the values of the associated real estate assets, thereby providing investors with a cost-effective way to invest in the real estate market, real estate owners with the ability to protect their investments, and speculators with the ability to make directional speculations on the value of real estate.
The proposed invention satisfies the needs of a variety of parties. First, new home purchasers are benefited by the creation of a financial vehicle that alleviates some of the financial burden associated with purchasing a new home. In addition, the proposed invention benefits homeowners and other property purchasers since it will likely lead to the commoditization of the brokerage function and, inevitably, to lower brokerage fees.
Mortgage loan originators, including commercial banks, finance companies, and thrifts, are also benefited in a number of ways. By purchasing, investing in, and trading brokerage fee options, a mortgage lender could, for example, offer existing clients various methods to turn their REBOs into cash at the time of loan origination (for example, a lender could offer a borrower a cash rebate at the time of loan origination in exchange for selling the REBO), thus creating future profit opportunity for the lender. Mortgage lenders could also broaden internal cross-marketing opportunities by offering the product through existing internal programs (such as credit card clients, depositor clients, etc.), and capture new external market share by purchasing REBOs from mortgage clients of competitors. This would provide the ancillary benefit of establishing a new lending/banking relationship with new clients. Finally, a mortgage lender could resell acquired REBOs at a profit to others, such as the existing brokerage community, speculators, insurance companies, and competitor institutions.
In each case, the entity that creates or purchases REBOs accesses a future stream of predictable revenue and profits. That entity is further able to cross-sell existing products to both existing clients and new clients, creating a substantially larger potential client pool. Additionally, to the extent such an entity may become inclined to enter the brokerage business (whether through acquisition of a brokerage service provider or otherwise), it can vertically integrate the organizations, thus moving itself to a position closer to its customer base. Finally, as a potential ancillary benefit, such an entity could generate substantial predictable mergers and acquisitions fees by advising existing brokerage firms and potential acquirers who will either choose or be forced to merge as a means of increasing their capital base in order to compete once this new capital markets product is introduced.
Real estate brokerage companies could also benefit from the present invention since the REBO would allow them to gain access to a new source of brokerage assignments and fees. Finally, investors will inevitably benefit by creation of the REBO and the resulting trading of REBOs because investors are always seeking new investment vehicles to diversify their portfolios. Furthermore, securitization of brokerage fees and the creation of a brokerage fee futures and options market will provide investors with more opportunities and alternatives. Other features and advantages of the present invention will become apparent in the following detailed description.